What is a 401K and how does it work? What is the best one to use?

Answer 1

A 401K is a retirement plan set up through your employer. You can't really say there is a "best" way to run it for all people.

You can diversify how you like, depending on your age:
Stocks - higher risk
Bonds - Moderate risk
Money Market - low risk

the attached link does a good job explaining the various aspects of a 401K. I highly recommend them.....especially if your employer matches part of your contribution.

Answer 2

It's called a 401(k) plan because that's the part of the internal revenue code that allows for it.

To participate in a 401(k) plan you have to work for a for-profit company that offers one. You contribute to the plan with pre-tax dollars. For example if you earn $1000 per pay and you contribute 10% of that your employer will calculate your tax withholdings for that pay as if you had earned only $900, so your account increases by $100 but your paycheck is reduced by something less than $100.

The IRS will allow you to contribute up to $15,000 per year in 2006 or $20,000 if you are 50 or older.

When you withdraw money from your 401(k) that money will be taxed. If you withdraw money before you are 59 1/2 you will always have to pay a penalty.

You must start withdrawing money from your 401(k) when you are 70 1/2.

Your employer might offer a matching contribution but is not required to.

The investment options available to your 401(k) will vary depending on the plan administrator that your employer chooses.

The Roth 401(k) was recently introduced. It is similar to the "traditional" 401(k) except that contributions are after tax and earnings are tax free if you are 59 1/2 and the account has been open for 5 years or more.

If you work for a government you may have a 457 instead of a 401(k). If you work for a non-profit (school, hospital, etc.) you might have a 403(b) instead of a 401(k).

Answer 3

A 401k is an employer sponsored retirement plan. The section of the Tax Code that allows for its creation is 401(k) hence the name. In this type of plan you elect to have a percentage of your salary go in as your contribution. The benefit is that the $ you put in goes in before taxes which does 2 things it reduces your taxable income and it grows tax deffered. Another benefit is that many employers match up to a certain percentage your contributions.

As to which is the best 401k there are many different investment choices available for 401k plans. Company Stock, Mutual Funds, Annuities etc depending on the choices offered by your plan. The firm which your company has contracted with to administer the plan may offer advise as to which investment(s) would be right for you based on several factors. Age, Risk Toelrance, etc.

Answer 4

The 401K is a tax deferred savings fund originally designed for the mega rich as a means of sheltering income. It however never caught on and congress reworked the plan and offered it to the masses. In its original form it did not produce significant returns suitable for the rich who prefer investing in actual commodities like gold and silver which to some is the ultimate hedge against inflation.

As far as the current 401Ks, I would recommend any Fidelity product. I have a portion of my monies invested in a Fidelity energy fund which as you can imagine is giving me over a 41% return. I don't see it ending soon but I don't recommend placing all of your retirement funds in that volatile of a market. They work like anyother retirement plan but I find give you a little more control then an IRA. They also have somewhat different tax advantages and requirements.

Answer 5

You contribute some of your salary. And when you go to pay your taxes, that part is not counted, so your income is lower, so your tax is lower. You pay tax on that money when you withdraw it later after you retire. Then it goes into an account and you earn interest. The best part is sometimes your employer 'matches' some of your contribution. Which is like free money. Then it all earns interest until you retire. Short answer is contribute the maximum you can.

Answer 6

the only think 401k i know is the insurance plan..it is definaltey a very good plan and covers alot.